Kazakhstan has been shocked by the announcement that its largest oil venture and taxpayer will suspend a $3 billion expansion plan to increase oil production. Officials cited the failure of Tengizchevroil partners to agree on the project, but they also blamed government pressure from a new investment law.

Boston, 18 November 2002 (RFE/RL) -- Industry experts have reacted with dismay to an announcement that Kazakhstan's oldest and largest foreign joint venture in the oil sphere has dropped plans for a major expansion that had been in the works for several years.

On 14 November, the U.S.-backed venture with Kazakhstan known as Tengizchevroil (TCO) said it had put aside plans for a second stage of development that has been variously estimated at from $2.2 billion to $3 billion.

The failure of U.S.-based ChevronTexaco to agree with its partners on approving a budget for the project could doom the expansion to increase production from 254,000 to 440,000 barrels per day by 2005.

In a statement, the venture said, "The TCO partners have not yet been able to agree on a funding plan that would support the...expansion projects while, at the same time, provide for the diverse financial needs of the partners," Reuters reports. The company added, "However, TCO partners remain open to working toward a mutually agreeable solution to the funding issue that would allow the projects to proceed."

The partners include ChevronTexaco with 50 percent, the Kazakh state-owned oil company KazMunaiGaz with 20 percent, U.S.-based ExxonMobil with 25 percent, and a Russian-American joint venture LUKArco with 5 percent.

The decision is likely to come as a blow to the Kazakh economy, which relies heavily on TCO as its largest taxpayer. The joint venture, which was organized in 1993, has been a U.S. policy priority for the region as far back as the administration of President George Bush, the current president's father. The elder Bush was president from 1989 to 1993.

The move already seems to be having an impact. TCO said drilling activities at the giant Tengiz field in the oil-rich western part of the country have already been suspended. Industry sources told RFE/RL that local employees have been told to brace for layoffs. TCO plans to maintain current operations, though the expansion has halted for now.

A company source, who spoke on condition of anonymity, said the problem was that the expansion project required a unanimous vote of all four partners. The source refused to identify the dissenting party. But the official also said that a difficult investment environment in Kazakhstan has played a role.

Foreign companies have been fighting for two years against a new Kazakh draft investment law that could prevent them from appealing to international arbitration in case of disputes with the government. The government has used the threat of the law to press for higher taxes on foreign oil companies than originally set in their contracts.

Thane Gustafson, senior director of Cambridge Energy Research Associates, a U.S.-based consulting firm, said, "I only know from talking to some of my colleagues...that there's been a great deal of unhappiness with the investment climate, so I'm not terribly surprised." Gustafson spoke to RFE/RL on the sidelines of a U.S.-Russian Investment Symposium organized by Harvard University.

Julia Nanay, director of Petroleum Finance Company, a Washington-based consultancy, said in a phone interview, "Clearly, it's going to decrease the production that was expected in Kazakhstan." Nanay said the project required investors to shoulder a financial burden for the next three years in order to realize the production increase. But other factors like shipping tariffs have also risen. Nanay said, "Everything suddenly has just gone wrong."

The Kazakh government also seems to have ignored warnings that its pressure on foreign companies would affect big investors like TCO, which have invested billions of dollars in establishing a presence in the country.

But "The Moscow Times" reported on 15 November that another large venture for the huge Kashagan oil field "is likely to shelve multibillion-dollar" development plans at the end of this year if the Kazakh government does not cease to demand major contract revisions." The paper quoted a source close to the consortium for the project.

A ChevronTexaco source voiced hope that the Tengiz expansion could be restarted, saying that the production committee for the project could meet and vote again at any time. When asked what it would take for such a decision, the official said ending the threat of the new investment law would help, although it is not clear that it would be the deciding factor.

The suspension is also likely to hurt the economics of a $2.5 billion pipeline from Tengiz, which opened last November after years of delay. In August, the Caspian Pipeline Consortium announced plans to double the line's capacity for oil shipments to Russia's Black Sea port of Novorossiisk. The Russian government is the biggest shareholder in the line with a 24 percent interest. Kazakhstan owns 19 percent, while ChevronTexaco holds 15 percent.